07/09/2023

Inheritance Tax

All is not IHT lost

With the cost of living crises & higher interest rates, the value of land or property (L/P) in some areas of the UK may have fallen over the past 18 months.

If L/P within a deceased’s estate is sold for less than the probate value within 4 years of the date of death, the appropriate person (usually the executor) can make an inheritance tax (IHT) loss relief claim within 7 years of the date of death, to effectively, for IHT purposes, replace the original probate value with the sale price and recover the IHT on the difference.

The claim cannot be made if:

  • The difference between the sale price and the probate value is the lower of £1,000 or 5% of the probate value or
  • The L/P is sold to a connected person of the deceased e.g. children or grandchildren or
  • The estate has a right to retain or acquire an interest in the L/P after the sale.

A simple example

  • Mary Garrity died in January 2022 owning a rental property with a probate value of £800,000.
  • In May 2023 Mary’s executors sold the house to an unconnected third party for £720,000.
  • The executors could make a claim to replace the original probate value with the sale figure resulting in an IHT refund of up to £32,000 (£80,000 at 40%).

However, care needs to be taken especially if the estate has other land or property they are intending to sell. Once the claim has been made it cannot be withdrawn. So the timing of the claim and even whether or not it is beneficial to make such a claim needs to be considered.

Exploring Inheritance Tax (IHT) in relation to property and land and how to save tax

The reason for that is if, say, Mary’s estate had another L/P and sold that within 3 years of her death at a greater value than the original probate value, then, because the executors have made the IHT loss claim, that higher value also replaces its initial death value when looking at the revised IHT position. So the estate could end up paying more in tax than before. The only exception to this rule would be where the loss claim related to a sale of a L/P in year 4 following the date of death.

When considering making a claim it is important to note that any discounted element of value given on death for jointly owned property has to be ignored when comparing the sale price to the probate value.

For example

  • The deceased, Tim Rudge, jointly owned a half share in ‘The Valiant’ property valued at £400,000 at the date of death. The deceased’s half share, after a discount, was £180,000.
  • A year after Tim’s death, the property was sold for £390,000.
  • Any claim would not be in the estate’s favour as it would replace the initial death value of £180,000 with the half share of the sales price, £195,000.

If an estate sells shares within 12 months following the date of death, for less than the probate value, an IHT loss relief claim can also be made within 4 years of the deceased passing away. The shares cannot be unlisted or traded on the Alternative Investment Market. Similar to the L/P criteria, all shares sold within that 12-month period, including those which were sold for a greater value have to be taken into account if a claim is made.

Tip
If you would like us to review the Estate position to see if a loss claim is worthwhile making then please do not hesitate to contact us.

A meeting about if an estate is sold within 12 months of death for less than probate value and how to make an Inheritance Tax (IHT) loss relief claim

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